LLC vs. S Corp: How One Simple Form Could Save You Thousands
When you’re running your own business, there’s no shortage of decisions to make, logo colors, client pricing, what method of marketing to use. But one decision that often gets overlooked (and can quietly cost you thousands) is how your business is taxed.
Let’s say you’ve already set up an LLC. Great first step. You’ve protected your personal assets and planted a legal flag for your operation. But here’s where many folks stop which the IRS loves.
Enter Form 2553. It’s a four-page document that can change the entire tax structure of your business. With this form, you’re telling the IRS: “Hey, I’d like my LLC to be treated as an S Corporation for tax purposes.” And here’s why that matters.
What’s the Big Deal About an S Corp Election?
When you’re taxed as a sole proprietor or partnership through an LLC, all of your business net profits are subject to self-employment tax, currently 15.3% once they hit that Schedule C. That includes both the Social Security and Medicare portions.
But when you elect to be taxed as an S Corp using Form 2553, you unlock a major tax strategy: splitting your income.
Let’s break it down with a real-world example.
Meet Jasmine, a Denver-based freelance marketing consultant.
She formed an LLC in 2022 and netted $120,000 in profit last year. If she’s taxed as a sole proprietor (default LLC treatment), she’ll pay self-employment tax on the entire $120,000. That’s roughly $18,360 just in SE tax on top of income taxes. She will get to deduct half of the Self Employment against her other taxable income, but she's not getting off the hook for the other $18,360.
Now let’s rewind. Same income, but this time she files Form 2553 and elects S Corp status. As an S Corp, Jasmine pays herself a “reasonable salary” let’s say $60,000. The remaining $60,000? That flows through to her as a distribution, not subject to self-employment tax.
Her SE tax is now based only on the $60,000 salary, saving her around $9,180 in SE tax alone.
Yes, electing S Corp status does come with some new requirements: you’ll need to run payroll (even if it’s just to yourself), file an S Corp return (Form 1120S), and likely work with a tax pro to keep everything tidy. But that’s what the accountants are for. Once you have your S-Corp up and running, you hand over the reigns to them and reap the rewards.
In most cases, once your business starts clearing $40,000 to $50,000 in net income, it’s worth looking at the S Corp election seriously.
Louisiana and Colorado: A Quick Look at State Impacts
If you’re operating in Louisiana, the good news is that the state generally conforms to federal S Corp treatment. You won’t be double-taxed, and your flow-through income keeps that same favorable treatment. But don’t forget, Louisiana has a $100 annual franchise tax for corporations, including S Corps. It’s not a dealbreaker, just something to budget for.
Now in Colorado, the S Corp love continues. The state recognizes the S Corp election and treats it similarly to federal law. There’s no corporate franchise tax here, which gives Colorado business owners a slightly easier ride. That said, you’re still required to file a separate state S Corp return and report shareholder income properly, so keep your filings clean.
The Clock’s Ticking on Filing Deadlines
Here’s the catch. Form 2553 is time-sensitive. To have your S Corp election kick in for the current tax year, you generally need to file it within 75 days of the start of your tax year (typically by March 15 if you’re on a calendar year). Missed the deadline? There are late-election relief options, but they require extra steps and a bit of IRS sweet-talking.
Final Thought: It’s Just One Form, But a Huge Opportunity
Choosing to be taxed as an S Corp isn’t right for everyone, but for growing businesses, it’s often the missing link between “making money” and “keeping money.”
Form 2553 is free to file. The savings can be huge. And when paired with smart payroll planning and professional bookkeeping, it can be a game-changer for your bottom line.